In many ways online communities represent the Holy Grail of what the Internet is supposed to make uniquely possible, opening up new ways for companies to interact with their customers. But how do you make online communities work? What is the ROI for investing in community building?

In many ways online communities represent the Holy Grail of what the Internet is supposed to make uniquely possible, opening up new ways for companies to interact with their customers. But how do you make online communities work? What is the ROI for investing in community building?

The Theory
Loyalty and customer retention are arguably the key drivers behind CRM as a business approach. Certainly the key reason why any business would invest in building online communities is customer retention. In all cases customer retention leads directly or indirectly to increased revenues.

For a business driven by advertising revenue community must deliver more users, more visits and longer visits. Equally, research has shown that members of an online community are more responsive to advertising and their trust transfers into greater propensity to transact with advertised brands. E-commerce operations also hope to use online communities to build trust and awareness within their customer base, which benefits their brand and translates into a higher frequency of purchase, across a broader product range, with a larger average basket size.

The Practice
Community used to be a standard wish-list item for every company's web site, usually as a sub-category of sticky content. But companies have become increasingly aware that setting up and, more importantly, managing an online community is a large and costly project.

So what makes a successful online community, both for the customer and for the business? Below are the Top 10 lessons that have been learned:

1. Don't overestimate your ability to create an online community.
As a general rule, companies tend to overestimate the number of people who will want to take part in a community. Depending on the site proposition and target market, you might expect 1 in 10 site visitors to be interested in community. Within any discussion or chat area a read-to-post ratio of 200:1 is average. That means you will need 2,000 site visitors to generate just one contribution. Furthermore, building a good online community takes time--typically several years.

2. Be explicit in how you are generating money from people.
People are smart. They know that you have to make money to continue to provide the services they value. Do not be afraid to point out to them how you are making money. Do not try and covertly generate revenue (e.g. by selling customer data without proper permission or disguising advertising).

3. Employ expert community staff.
If you look behind some of the best-known community sites on the Web, you will find community producers with years of proven expertise in managing communities online. They are passionate about the issues the community is centered around, they are able to mediate between community members effectively, they are intuitive and sensitive to the emotional dynamics of the community.

4. Have a strong community philosophy.
Communities will only succeed if there is a reason to be there, a reason to care, a kernel of passion about the issues that matter to members of the community. If you try to create and manipulate an online community with purely commercial goals in mind, you will fail.

5. Focus on meeting users' information needs.
You must assume that the majority of people are not coming to the community out of a sense of great benevolence but because they have an immediate and specific need that they hope the community might help them with. This might be advice to support a purchasing decision (cf. Amazon's reader reviews) or help in finding relevant information or services.

6. Only the community can effectively police the community.
You can and should create guide rules for people to refer to and mechanisms to allow intra-user policing (e.g. ratings, reporting offensive posts etc.), but ultimately you must create an environment that people will not abuse because they can see that no-one else is behaving is such a way.

7. Growth has to be managed carefully.
Empty discussion forums may be one problem, but successful communities can also become victims of their own success. If the community grows out of control then its value can quickly dissipate, alienating previously committed members.

8. Create a physical sense of place.
Despite being virtual online communities like to feel a sense of place--a grounding which helps give the community a stronger sense of identity than just anonymous interactions over the Web. Commercial partners can help in this regard, as can real world events, PR, giving contact phone numbers for people to ring etc.

9. Reward community members who contribute value.
If people are contributing value, they need to be rewarded to show others the benefits of contributing and to further win the commitment of your most valuable community members. Reward may be in the form of heightened status (e.g. a "top reviewer" rating), access to premium content or services, or more direct access to your staff.

10. Let the group take its own course.
Rather than trying to force the evolution of a community down a particular path, it is much better to see what is popular and what works, and capitalize on that. This allows you to spot opportunities and grow business value in areas that were not perhaps initially apparent. It allows you to mold your value proposition to the needs of the community--their "pull" a much easier sell than trying to "push" your products and services. Equally, advertising will be much more effective if it fits with the evolving needs and interests of the community.
iVillage Case study

iVillage (http://www.ivillage.com) has built a name for itself as one of the leading examples of successful community building on the web. As well as following the best practice guidelines outlined above they have also discovered the following:

• Community members are five times more valuable.
iVillage's principal revenue stream is through advertising and sponsorship so a valuable user is one who visits the site often, has a favorable profile, generates a lot of page impressions, refers friends, generates content to attract more visitors and is responsive to adverts. In these respects iVillage has found that a site user who takes part in the community is 5 times more valuable than a 'standard' site visitor. The community section is indeed the most 'sticky' part of the site.

• Community members are iVillage's best sales force.
The number of referrals from community members is significantly higher than for the average site visitor and word of mouth remains the most cost effective and targeted form of marketing. After only seven months in the UK, 7 percent of iVillage UK's (http://www.ivillage.co.uk) users came through a recommendation by a friend and 96 percent of "send to a friend" e-mails result in a customer acquisition

• Community members are the source of alternate revenue streams.
iVillage is increasingly re-selling user generated content to other publishers, exploring ways that the power of the online community can be transferred offline (e.g. events) and using the higher responsiveness of community members to help provide valuable market research data.

Make no mistake. Achieving community on the Web is a big undertaking. Information sharing and networked communications between people with a common interest may have been the reasons that the Internet took off in the first place, but trying to use the community power of the web for business benefit is a very challenging task. To mix business with online communities is to walk a fine balance between genuine, selfless, almost idealized, dedication to the group's cause on the one hand and yet a much more deliberate and calculated evaluation of business ROI on the other.

If done properly, it can pay dividends. Equally, if done poorly, it can be very damaging both to your brand and your bottom line.